Lawful Post Termination Competition

Mon, 09 Jul 2012

By Richard Adkinson
A recent case from the Court of Appeal has had to consider the vexed question: does an employee owe a fiduciary duty to his employer? Well, it depends on the contract, but it is not implied by the law. 
 
In Customer Systems Plc v Ranson [2012] EWCA Civ 841, CS provided IT services and, R was a senior employee of theirs. He was not a director. R had decided to go into business on his own account, which would compete against CS. He had taken preliminary steps to set up the new business, and had been approached by two of his employers existing customer before he resigned from CS. 
 
CS alleged he was in breach of his contractual terms and conditions and of a fiduciary duty that required him not to have dealings with customers or to tell CS that he had spoken to CS’s clients about work for his new business, even though those customers had approached him.
 
Though CS succeeded in the High Court, it lost on appeal. Lewison LJ delivered the only judgment.
 
He said that ordinary employees are different to directors: the law implies a fiduciary duty on the latter, but not on the former. For employees, if not expressed, there is an implied into an employment contract a duty of fidelity only.
 
The difference is as follows: a fiduciary duty means that there is a duty to act in the best interests of the company. A duty of fidelity is merely a duty to carry out faithfully the work one was employed to do.
 
Thus the starting point is to consider the employment contract and construct from that how far the duty of fidelity goes. Lewison LJ noted that the implied duty of fidelity does not go so far as to require an employee to inform his employer when he was doing outside work in breach of contract; even in the context of a director's fiduciary duties there was no free-standing duty on the director to inform the company of his own wrongdoing.
 
It did not follow that an employee might never owe a fiduciary duty e.g. requiring him to disclose his own wrong, but it has to be duty arising from the contractual terms. He relied on University of Nottingham v Fishel [2000] ICR 1462 where Elias J (as was) said that
 
“This is not to say that fiduciary duties cannot arise out of the employment relationship itself. But they arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken.”
 
In the instant case, the contract did not contain any restriction on what R could do after he resigned. He could therefore set up in competition the day after he resigned if he wished. Nothing that he did was more than the first steps to setting up a business for when he left. This was not infidelity. He was thus not in breach of his duty of fidelity.
 

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